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Federal vs. private student loans: What's the difference?

College student using tablet pc
Knowing the difference can help you decide how best to fund your education. Getty Images

When it comes to college, there are several applications you need to fill out, and it goes beyond the school itself. Once you get accepted into a school, you'll need to figure out how you're going to pay for it. 

That's when student loans come in. You will need to determine whether you qualify for federal student loans or if you'll want to go the private student loan route. There are many reasons to consider a private student loan if you aren't able to secure a loan through the government. In general, there are multiple ways to save money with student loans, you just need to understand how each works.

Don't wait until the last minute to apply. Learn more about private student loans now!

What exactly is the difference between private and federal student loans? Here's what to know.

How are federal and private loans different?

Federal student loans generally have more favorable terms. They offer forgiveness, cancellation and discharge alternatives in addition to the recent plan announced by the Biden administration.

Private loans can fill a gap when public loans, scholarships, fellowships, subsidies and grants aren't enough to pay for school, but without the same government payback options like deferral or forgiveness.

If you're looking for a loan to help fund your education, you have multiple options to pursue. You can easily get started today.

Here are some other key differences:

Federal student loans

If you applied for your loan directly through the Free Application for Student Aid (FAFSA) form and were approved, you likely have a public student loan. Federal student loans come in specific forms from the U.S. Department of Education:

  • Direct unsubsidized loans (no requirement to show financial need)
  • Direct subsidized loans (must demonstrate financial need)
  • Direct PLUS loans for graduate and professional students 
  • Direct PLUS loans for parents of students attending loans 

Other things to know about federal student loans

  • They carry fixed interest rates.
  • The amount you can borrow is limited.
  • Repayment options include income-based plans, waivers, deferrals and other options if you fall behind or default.
  • They limit the size of both unsubsidized and subsidized loans.
  • You can return or cancel part of the loan within certain timeframes.
  • Loans can be consolidated under a federal program.
  • Wages may be garnished if you default.
  • Payments differ depending on loan type: An unsubsidized public loan's principal is typically deferred for six months after the student borrower graduates. But interest starts accruing when your school gets loan proceeds. You can opt to pay the interest right away or have interest payments added to the loan's principal, called capitalization. With capitalized interest, you pay more long-term. Put another way: you'll pay interest on the interest because it becomes part of the principal. Under a subsidized public loan, however, the government makes the interest payments until deferral ends and regular payments begin.

Private student loans

Private, or non-government-administered, student loans are offered by a variety of financial institutions such as banks, credit unions and other financial companies. They're also the only type of the two that offers conventional refinancing options, which may be a good alternative if forgiveness isn't available for your loans. 

You can explore your private student loan refinance options now to see if you can save cash.

Other things to know about private student loans

  • They can work well for borrowers with established credit. 
  • Rates, requirements and fees differ and are set by each institution. 
  • They aren't eligible for public loan forgiveness programs and most government programs. 
  • Repayment terms can be strict.
  • Some require payments while you're still in school (while others have a feature that allows you to wait until after you graduate).
  • Some carry variable interest rates (meaning the interest can change).
  • They generally require a parent or guardian to co-sign the loan (or the prospective borrower needs to have an established credit record).
  • They're mostly unsubsidized - you are responsible for the interest.
  • They can be refinanced - but not consolidated under federal programs.
  • You may be able to borrow more than under public loan programs, depending on creditworthiness.
  • Some require "prepayment" penalties or fees to pay off the loan early. 
  • You may go into default as early as three missed payments.

How are private and federal student loans similar?

In both cases, you're borrowing money to pay for school and should consider your ability to make payments once you graduate, including your anticipated income. Both public and private loans:

  • Help pay for postsecondary education including college. 
  • Generally require monthly payments.
  • Have interest payments that may be tax deductible. 
  • Can be complicated to navigate, so thoroughly research each kind.
  • Both kinds of student loans can go into default if you miss a certain number of payments.

Bottom line

The type of loan you need depends on your personal situation. Financial regulators and experts recommend researching and exhausting all avenues for public student aid, scholarships, fellowships and borrowing before using private loans. 

Some states also provide low-cost loans for students.

Whatever fits your needs, experts warn you should never pay with credit cards, which carry much higher interest rates than student loans, public or private. Thoroughly research your options. An online financial adviser can also help steer you in the right direction.

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